Should investors buy into LinkedIn's IPO hype?

In the first quarter of 2011, LinkedIn's revenues reached $93.9 million, a 110 per cent increase from the year-ago period.

Net income was $2 million, compared to $1.8 million in the first quarter of 2010.

The IPO has been highly anticipated because LinkedIn will set the ball rolling for other high-profile Internet companies projected to go public in a year or two, including such firms as Facebook, Zynga, Groupon, Pandora, Kayak, Yelp, Rovio and Zillow.

The web site, which was launched in May 2003, has more than 100 million registered users in more than 200 countries.

Should investors buy into LinkedIn's IPO hype?

According to recent news reports, some Facebook shareholders tried to sell shares at a valuation of $90 billion but failed to find buyers.

Secondary markets have become a popular means for insiders at private technology firms to cash in prior to an IPO.

The problem with LinkedIn is that, unlike Facebook and other social-networking sites, a substantial majority of its members do not visit its web site on a monthly basis, and a majority of its page views are generated by a minority of its members.

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Image: Most members do not visit the site on a monthly basis.Photographs: Reuters

Should investors buy into LinkedIn's IPO hype?

The web site acknowledges: 'If the company cannot increase the breadth and frequency of our visiting members, then its growth will fall short of expectations, and its profits and stock price will follow.'

LinkedIn also admits that the number of its registered members is higher than the number of actual members because 'some members have multiple registrations, other members have died or become incapacitated, and others may have registered under fictitious names'.

The company's admission that: 'We do not have a reliable system to accurately identify the number of actual members' will be true of other such sites, but since LinkedIn will be the first social-networking site to float an IPO, this admission can prove crucial for those investors who are looking at the long-term picture.

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Image: There are more registered members than actual members.Photographs: Reuters

Should investors buy into LinkedIn's IPO hype?

Another issue that could potentially rattle long-term investors is the company's statement that it does not generate majority of its revenue from users, simply because most of the members prefer free membership, but from companies that use the web site for marketing or recruitment.

As if all this wasn't enough, LinkedIn says its profitability is going to decline in the short term as it plans to invest heavily in 2011 and aggressively expand its workforce, especially sales staff.